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On January 1, 2007, ABC Corporation signed a 5-year non-cancellable lease for a machine. The terms of lease called for this corporation to make annual payments of $8,668 at beginning of each year, starting January 1, 2007. Machine has the estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to lesser at the end of the lease term. Corporation uses straight-line method of depreciation for all of its plant assets. Corporation’s incremental borrowing rate is 10%, and the lesser’s implicit rate is unknown.

Instructions

a. What kind of lease is this? Describe in detail.

b. find out the current value of the minimum lease payments.

Make all essential journal entries for ABC Corporation for this lease through January 1, 2008.

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